Abstract This article focuses on changes in tax rates under the deferred and liability methods of interperiod tax allocation. There are three basic methods of interperiod income tax allocation. These are the deferred method, the liability method and the net-of-tax method. Under the liability and deferred methods, the tax effects of timing differences are considered to affect the financial reporting of income tax expense, and deferred tax assets and liabilities. These two methods differ principally in their conceptual underpinnings and their treatment of changes in tax rates. Moreover, changes in tax rates and changes in actuarial assumptions are equivalent to changes in accounting estimates. Changes in tax rates are reported cumulatively under the liability method, prospectively under the gross change version of the deferred method, and usually not at all under the net change version of the deferred method. Thus, changes in tax rates are given immediate recognition under the liability method but delayed recognition under the deferred method. Furthermore, changes in tax rates should not swamp reported earnings, for the same reason that changes in actuarial assumptions should not swamp reported earnings. Both changes reflect the unavoidable inability to predict such changes rather than changes in underlying economic phenomena. Both changes should be afforded delayed recognition.
Hugo Nurnberg (Tue,) studied this question.